Weekend reflections

It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. In keeping with my attempts to open up the comments to new contributors , I’d like to redirect discussion, as opposed to substantive new contributions, to the sandpit(s). As always, civilised discussion and no coarse language please.

I had a visit through the week from a friend, now based in Chicago, who is a director of a number of companies representing the interests of an Australian venture capital investor (female). Apart from stories of life in the US, wildlife, and why no-one ever messes with a skunk, he was telling me of a US seed company (plant seeds) with which he is doing business. This company is a bunch of gung-ho healthy greenies. They have a policy to encourage as many staff members to cycle to work. Method of encouragement: those who cycle are on pay scale elevated above those who drive. The nett benefits to the company are that they have an energetic workforce, and an empty car park. The empty car park becomes useful when they have oversized orders to fill, on which occasions they pitch a huge tent in the empty car park and bring in an army of students from the nearby university.

Listening to Leigh Sales on the ABC putting the question to Andrew Leigh, the ALP member for Fraser, one has a firm statement of what all right-thinking people think (pun intended), the odfficial ideology so to speak:

Sales: Andrew Leigh, as an economist, as an economist you’re trained to see that market forces are the best way to get good environmental outcomes [... goes on to raise the MDBA water allocation issue]

Leigh: That’s right Leigh … [...]

It’s really helpful that the ABC helps out in the cat-herding business by reminding us all what to think. The Murdochracy needs all the help it can get when training economists what to think.

It would have been nice if Leigh had corrected Sales, pointing out that “market forces” weren’t always what they seemed to be and that while “market forces” were sometimes good at delivering some public goods, economists (the worthwhile ones anyway) would have an eye to their limitations in delivering outcomes where significant risk and uncertainty attached or where there were accretions of monopolistic or monopsistic power or in circumstances where there were significant collective action problems.

Then again, in a week and during a program when when he was taking a swing at Hockey for opening the door to state intervention in the private banking system, getting off message would have been injurious to his political health.

Yes Fran, getting ‘off message’ for a good party hopeful still prevails in Canberra despite the ‘new paradigm’. I was particularly reminded of this in scanning the SMH letters to the editor on Friday, virtually all devoted to the near empty House of Reps when Wilkie and Brandt spoke in the Afghan debate. Now no one says a party member has to sit through a lengthy debate such as the on again-off again Afghan gig. And as a listener you have no inkling that a speaker is virtually alone in the people’s house. But as a listener you had to listen to a couple of days of the same ‘stay the course’ uniformity yet know that a majority of Australians oppose this line. So any alternative view was eagerly awaited, at least by an interested public. For those ‘on message’ I suppose there is always Hansard. .

I missed Andrew Leigh, economist, on Lateline. But I know what question I would have put to him without the qualification. Even with the Leigh Sales intro I would have been more interested in economies of 21st century warfare than trying to screw Hockey’s bank bashing.

Oh I think paying out Hockey for his incoherent and hypocritical rightwing populist posturing was highly called for — there’s no harm in point out that his crowd are all over the place. As I’ve said before, allowing them to hold multiple constituencies is bad policy.

If you are erudite and thoughtful, not to say a nominally liberal economist you do that in a way which articulates a new and more coherent vision of the role markets can play in a contemporary economy and don’t allow the journo to set the terms of discussion.

I take particular offence at Murdoch’s implicit claim that he is an iconoclast who welcomes iconoclasts. There is nothing iconoclastic (in any proper philosophical sense) about a corporate capitalist who supports the established and oppressive imperial capitalist system which is now at least 150 years old. Corporate capitalists like Murdoch are only iconoclastic in the banal and totally philistinic sense which Marx described; namely that capitalism destroys EVERY other value in the world both social and environmental.

“For those of us who grew up believing that capitalism is the foundation of democracy, market freedom, and the good life it has been a rude awakening to realise that under capitalism, democracy is for sale to the highest bidder, the market is centrally planned by global mega-corporations larger than most countries, the elimination of jobs and livelihoods is rewarded as an economic virtue, and the destruction of nature and life to make money for the already rich is viewed as progress.”

He sees capitalism as a cancer on democracy, a market economy and an ethical culture which are the planks on which we wish to build our societies. In my ignorance, I saw the others as the parts of capitalism and it is illuminating to find this isn’t so.

I’m not sure what point you’re making. Do you have a specific criticism of Murdoch or is it just that he’s a naughty capitalist? I don’t agree with every Murdoch says but I think he is a very thoughtful person who wants to make the world a better place. People who hate him without listening or responding to what he says don’t deserve to be listened to either, imo.

@Joseph Clark
OK, I’ll make a point then. The guy is the proprietor of a organisations that claims to “report the news” but spews out pure propaganda like this and this. No corrections are made and nobody seems to be held accountable. If that sort of slimy journalism was being perpetrated by the ABC, there would be some expectation that the chief executive might do something about it. Why the guy has any credibility left baffles me.

I don’t agree with every Murdoch says but I think he is a very thoughtful person who wants to make the world a better place.

One can think as one sees fit but there’s simply no evidence at all for such an inference. He wants the world to serve his interests better than it does already and since at least in his case, that is entirely inconsistent with the world being a better place the claim fails.

Murdoch steers the news he controls, in the same manner that a CEO can steer any organisation – hire people with similar views or idealogical pedigree, and use FUD to keep them in line. It works but unfortunately the industry of news manufacture and reporting is one in which facts should hold sway over the CEO’s philosophy of life. Murdoch’s national rag in Australia does not meet a standard of journalism that I want in a newspaper, so I don’t buy it. It is a vexed issue because while news is entertainment, it is also necessary for the public to be informed and this is the heart of the problem – slanted editing of news blocks the public from being informed in a fair and impartial manner.

Economists like me are trained to believe in markets as the best route to environmental protection. And I do. But I also know that smart policy will only succeed if there is a will for action – if we believe in our hearts that we cannot enjoy the good life without a healthy planet. [my emphasis: FB]

I wish you hadn’t done that Andrew. I was prepared to give you the benefit of the doubt and to blame the assertion on Leigh Sales’ ignorance and vacuity. What you really seem to be saying is that places where economics is taught are rather like secular madrassas with faithful servants of the market are turned out production-line style. You are it seems one of its products, and proud of it as you have been built to meet the exacting and relevant ASA quality standard: belief in market forces as the key to good environmental protection.

Yes, that’s what public policy needs. Yet another product of the knowledge economy pressed into the political service of we all know who.

Disclosure: I went along to David Suzuki at the Opera House last night, so perhaps I’m a little fired up. For some reason, his view on the role of markets in “environmental protection” was somewhat at odds with Mr Leigh’s approach here.

On a quick reading, here as some pointers as to why there might be some upset people around the Murray Darling Basin.

The MDBA report seems to use 2000 as a base year. What have we learnt from the last decade that might have some insight to offer? Specifically I’ll address irrigated dairy, important because the marginal value of water used in the Murray and Goulburn regions is determined largely by what dairy farmers are prepared to pay.

I can’t say exactly what data Quentin Grafton (ANU) has access to when he is quoted as saying that recent reductions in water have had virtually no effect on the Gross Value of Irrigated Agricultural Production, but people need to dig a little deeper than GVIAP, or they may well be described as “odious” by the less retiring members of the debate. Take the dairy industry for example. The milk production in the northern irrigation region of Victoria and NSW Riverina has contracted from 3 billion litres in 2000 to less than 2 billion litres currently (ie 33%+ reduction), while other regions in Victoria have had flat production. At constant prices (say 30 cents per litre) this is a $300 million dollar decrease in GVIAP, which may have been covered up by some of the recent years with a higher than average milk price. Given other areas have not shrunk, the main difference is obviously water. Keep in mind also that decreases in GVIAP or “revenue” are far smaller than decreases in profit, and many farmers have chewed through equity with the hope of recovery, and we’ll return to this point.
Recent allocations have decreased. For example, allocations for the Goulburn and Murray areas are respectively
In 2000: 100% and 200% Avg 150% *#
In 2007: 29% and 95% Avg 62%
In 2008: 57% and 43% Avg 50%
*simple, not weighted average
#all water allocated at 200% may not have been used, possibly an average of 100% could be assumed?

From the above, we can see that a reduction of allocations (of say) 50% has led to a reduction in Gross Value Dairy Production of $300 million or 33%, and that is with several years to adjust and invest in efficiency, but before all likely reductions in output have occurred, and I’ll return to this second point shortly.

To be fair, some of the reduction in output is rainfall related as well. Assuming uniformity across the basin (not correct), and reversing a relationship of 10% reduction in rainfall meaning a 30% reduction in runoff (Johnson), and assuming a perfect substitutability between rainfall and irrigation (not true for winter rainfall), than at most the recent 50% reduction in allocations with lower rainfall could be equivalent to a 67% reduction in allocation with ‘average rainfall’. So roughly speaking, a 67% reduction in allocation, means a 33% reduction in GVDairyP relates to (ceteris paribus). The 67% is probably an overestimate, and full adjustment has still not probably occurred, so 33% is probably an underestimate, so a reduction in water by a certain percentage leads to half that percentage fall in production.

The MDBA target reduction in sustainable diversion limits for those areas are 30%, from the base year of 2000, with their estimates for Whole of Basin GVIAP falling by 15% ($1 billion) with a 26% (3500GL/13700GL) reduction in water. This seems consistent with the above experience of dairy (ie GVIAP falls by half the percentage fall in water), but the actual MDBA estimate for the fall in dairy production was only 10% (figure 7.4) so I suggest recent experience and rough estimates put this figure wrong by a factor of 1.5 to 2.

However, there are two further issues: Has full adjustment taken place already, and what are the effects on profit. MDBA has an estimate of 8% reduction in farm profits basin wide, which is where I start getting a bit sceptical based on recent experience in dairy, and I think the following data address these two points.

Why do I think full adjustment has not taken place? If we look at the most recent ABARE survey data, the northern irrigation area has had farm profits of -$76,000 and -$110,000 for 08/09 and 09/10 respectively. Compare this to an average across the areas of Gippsland and the Southwest of -$3,500 and -$56,000 for the same years. So to suggest the current level of production would continue when businesses are losing $50-70,000 more than their contemporaries is shakey ground. The same picture holds if you consider return on assets, but for the readership that does not own a business, burning $50,000 gives a more real face to the numbers that a percentage ROA wouldn’t.

So to recap full adjustment has not taken place as businesses are taking unsustainable losses, and a 30% reduction in water will lead to at least a 20% reduction in GV dairy production, and the effect on profit will be much more severe than the 8% basin wide estimate. At a wild guess I’ll suggest a halving of dairy profits. As a starting point, MDBA/ABARE revisiting the assumed elasticities of substitution between inputs seems like an excellent idea, especially given the widely derided estimate of 800 job losses. In other words, labour does not substitute for water very well, and capital investment is not going to replace depreciation of assets if the business is not profitable.